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Executives

Clay Newton - VP, Finance

David Pierce - Chief Executive Officer

Analysts

Jason Gammel - Macquarie

Chad Mabry - KLR Group

John Bair - SKA Financial Services

Joel Musante - C.K. Cooper & Company

Roger Liddell - Clear Harbor Asset Management

Dan Mittag - Oppenheimer and Company

Alec Rutherford - Analyst

FX Energy, Inc. (FXEN) Q3 2012 Results Earnings Call November 9, 2012 1:00 PM ET

Operator

Good afternoon ladies and gentlemen and welcome to the FX Energy, Inc. Third Quarter 2012 Financial and Operating Results Conference Call. As a reminder today’s call is being recorded. At this time, I’d like to turn things over to Mr. Clay Newton, Vice President of Finance, please go ahead.

Clay Newton

Thank you, Deanna. And thank you all for joining us today. I’m Clay Newton, VP of Finance here at FX Energy. Welcome to our 2012 third quarter and first nine months earnings call.

This call will follow our usual format. I’ll talk about just a few key financial items, as substantial details available in our earnings release and our 10-Q that will be filed shortly and will be available on our website once it is filed.

After that, David Pierce, our CEO, will provide some operational updates. We’ll also have a Q-&-A at the end of David’s remarks.

I’d like to remind investors that during today’s call we’ll be making statements that are forward looking and consequently are subject to risks and uncertainties. Examples of these statements include statements regarding exploration, drilling, development, construction or operations that may be subject to the successful completion of technical work, environmental, governmental or partner approvals, equipment availability, or other things that are or may be beyond our control.

You should be aware that certain factors may affect us in the future and could cause actual results to differ materially from those expressed in these forward-looking statements. Such factors include the risks set forth in our Form 10-K we filed in March and in our other filings with the SEC. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained on this call to reflect subsequent events or circumstances.

I am pleased to announced that today, once again, we have reported record production and record oil & gas revenues for both the 3 and 9 month periods ended this past September 30th, with strong cash flow from our operating activities. We remain well positioned to move forward with our active capital program.

I’ve divided my remarks today into three sections. First, I’ll talk about production, revenues, and non-cash charges, followed by a review of our exploration and impairment charges. Then I’ll finish with a short discussion about cash flow, liquidity and capital resources.

Let’s start with production. Our production in the third quarter was 1.2 billion cubic feet of gas equivalent, compared to 1.1 billion cubic feet equivalent during the third quarter of 2011. Daily production for the third quarter of 2012 was approximately 13.2 million cubic feet equivalent per day, compared to 12.0 million cubic feet per day during the same quarter of 2011, an increase of 10%. As we reported previously, our third quarter 2012 production would have averaged nearly 14.0 Mmcfe/d but for Conference Call November 9, 2012 the unexpected shut down of our Zaniemysl well for nearly a month for unscheduled maintenance.

Total production for the first nine months of 2012 was 3.5 billion cubic feet of gas equivalent, compared to 3.3 billion cubic feet equivalent during the first nine months of 2011. Production for the first nine months of 2012 was approximately 12.8 million cubic feet equivalent per day, compared to approximately 12.0 million during the first nine months of 2011, an increase of 7%.

Production at November 5, 2012, was approximately 13.7 million cubic feet equivalent per day. Despite the production interruption at Zaniemysl, we are pleased to have achieved a production increase for both the quarter and the nine month period. With our Winna Gora well starting production later this quarter, we could see our average daily production for the full fourth quarter at approximately 14 Mmcfe/d. This growing production is a critical source of support for our exploration and development program in Poland.

As I mentioned, we posted record oil and gas revenues during both the third quarter and the first nine months of this year. Oil and gas revenues were $9.0 million for the third quarter of 2012, compared to $7.6 million for the same period of 2011, an increase of 19%.

Oil and gas revenues were $24.8 million for the first nine months of this year, compared to $22.5 million for the same period of last year, an increase of 10%. Regarding pricing, as we mentioned in our earnings release earlier today, the Polish low-methane tariff, which serves as the reference price for our gas sales agreements, was significantly higher during the first nine months of 2012, compared to the same period of 2011. This was due to two price increases approved by the Polish utility regulator since mid-2011. However, period-to-period strength in the U.S. dollar against the Polish zloty decreased our U.S. dollar-denominated gas prices.

Despite the two price increases, as a result of the fluctuation in exchange rates our natural gas prices in Poland only increased 6% year over year. While we’re on this topic, I’d like to spend a few minutes discussing currency issues in a little more depth. As you know, our functional currency in Poland is the Polish zloty.

Despite the fact that everything we do in Poland is zloty-based, including the generation of revenues, our operating costs, drilling costs, the construction of production facilities, overhead costs, and so on, we are required, for U.S. financial reporting purposes, to convert everything we do in Poland into U.S. dollars.

For example, our zloty-based natural gas revenues are 32% higher this year compared to last, rather than the 15% increase in U.S. dollar denominated natural gas revenues we will report in our 10-Q today.

So, while it’s disappointing to see our U.S. dollar denominated revenues adversely impacted by the strength of the U.S. dollar vs. the Polish zloty, it’s important to remember that we do benefit on the other side of the ledger. Our U.S. dollar denominated exploration and capital spending, along with our operating and administrative costs, are also lower because of the strength of the U.S. dollar.

In addition to the impact on our revenues, operating and administrative costs, and CapEx, we also continue to see significant non-cash foreign exchange gains and losses that have a material impact on our bottom line. In the first nine months of 2012, we recorded foreign exchange gains of about $12 million, compared to foreign exchange losses of about $16 million in the first nine months of 2011.

Please remember that it is the act of translating from one currency to another that creates these reported gains and losses. They are not realized gains and losses. They’ll continue to vary over time as the exchange rate between the US dollar and Polish zloty changes, however, these non-cash charges have no impact on our revenues, our cash flows, or our ability to execute on our capital budget.

We recently announced our decision to plug and abandon the Kutno-2 well in Poland. We charged approximately $9.0 million to exploration costs during the third quarter, which was the amount of costs incurred through the end of September. We expect to incur another $2 or $3 million of costs in the fourth quarter, which are related to deepening the well beyond its original target depth.

We also impaired the book value of our Kutno concessions, along with a few other concessions in our Warsaw South project area that we have determined not to be prospective for hydrocarbons. These impairments in Poland totaled about $700,000.

Finally, we also elected to impair the drilling costs spent on our Bakken project in northwestern Montana, totaling approximately $1.3 million.

I’ll wrap up with a few final words about our cash flow and liquidity and capital resources.

First, I’m happy to announce that all of the documentation necessary to have the $40 million draw limit removed from our credit facility has now been completed, and we now have access to the full $55 million outlined in our facility.

Net cash from operating activities of $5.8 million was $4.6 million higher than last year’s first nine months. We have, as I mentioned, $15 million of remaining borrowing capacity in addition to our $45 million cash balance and our expected higher cash flow, all of which is available for ongoing projects in Poland.

In our10-Q we have adjusted our CapEx estimate for 2012 to a range of $40 million to $50 million. However, we will have met our earlier target of committing $60 to $70 million for CapEx in 2012, as we have three projects, with a net estimated cost to us of about $20 million that we expect to be underway at year-end, with most of the costs coming in fiscal 2013.

With that background, I’ll now turn the time over to David for some operational updates.

David Pierce

Good afternoon. I’m David Pierce, CEO of FX Energy. Thanks for taking the time to join us today. I love hearing Clay talk about new records for production and revenue. Thanks, Clay.

I’d like to say a few words about our Kutno-2 well. Although it was deep, expensive and high risk, we managed to make it fit in our small company budget. It was a potential company-maker and we were extremely fortunate to have had the opportunity to drill it. While I am personally disappointed that it was not commercial, there was no shock in that outcome, we were always clear that it was very high risk. Exploration is all about managing risk and managing the budget. Thank you shareholders, for your support with Kutno.

I want to take just a moment to praise our drilling and exploration teams. Getting this well drilled professionally and safely is a tribute to our operations staff, especially considering the great depth. And our exploration team deserves very high praise for figuring out that the gas would not have been burned up at that depth. Even the porosity predictions were in the ballpark, at least where we had clean sands.

Unfortunately, we did not find anything like the thick, uniform dune sands that we see every day in the Fences. Still, I am grateful for having had the opportunity to drill this well and I want to give top marks to our exploration and drilling teams.

A few minutes ago Clay talked about high grading our concessions. This is an important part of managing exploration risks and budgets. It is a key element of our strategy in Poland. We look at large acreage blocks, assess the available data and compare relative potential, risk, cost and reward. Each of our concession areas is always in competition with all the others as we gather data and carry out our exploration work.

A new discovery, like Frankowo-1, means we will be spending a lot more money on exploration in that area. Managing the budget means we will need to drop other, less prospective acreage or risk diluting our efforts.

As Clay noted, we examined Warsaw South, kept the most promising blocks and shed the rest. Now we can bring more funds to bear on a smaller area and focus on just the best prospects in Warsaw South.

At our board meeting next week we will discuss our Northwest concession area along the same lines. We believe the Northwest has very strong potential in the Rotliegend, but with little existing seismic data and only a few wells it will cost a ton to explore it properly.

The flip side of this high grading process is that we get to ramp up exploration efforts on the very best of our concession blocks. Thankfully, we have the resources to support an increased level of exploration. The Fences has been our number one pick for some time, and even more so today in light of the prospects we see on our newest 3D seismic. Block 246 also took a big step forward with the data from the Frankowo-1 well.

We are optimistic about Warsaw South and also our Edge concession area, where we will start drilling the Tuchola-3 well before year end. Our goal remains, to identify fairly large areas, like the Fences concession, where we can explore at reasonable cost with a risked expectation that we can then develop significant reserves with a reliable cost/risk/reward profile. I’d like to say a few words about why we think the concession areas I just mentioned may qualify.

In Warsaw South we are following up on the good Carboniferous sands and gas shows in our 2011 Machnatka well and on our Wilga-3 well from twelve years ago, now depleted, where we produced rich gas and liquids from the Carboniferous. We have new 2D seismic this year covering prospects in the western part of the Warsaw South area. We should have processing, depth conversion and interpretation wrapped up around year end so we can talk with our partner in a couple of months about 2013 drilling.

In the Edge concession we expect to start drilling the Tuchola-3 well before year end. This general area has quite a bit of existing seismic data and a fair number of wells, none commercial. Many of the wells however, had good hydrocarbon shows in several different horizons.

Our Tuchola-3 well is targeting gas in the Main Dolomite at about 2500 meters and oil in the Devonian at just over 3000 meters. We like the Edge concession for its relatively shallow depths and abundant hydrocarbon shows in the area.

Our work so far suggests there may be a good many Main Dolomite and Devonian targets in our blocks, but we will need encouragement from the Tuchola-3 well to support a more comprehensive exploration effort. On the other hand, if we get that encouragement, we operate and we hold a 100% interest so we can move quickly to follow up on success.

In Block 246, our Frankowo-1 well has provided strong support for Main Dolomite and Rotliegend exploration. The Main Dolomite was positive, with 46 meters of pay and no water. We tested only briefly, but the well flowed at about 2 Mmcf/d without really cleaning up, it appears to be capable of a good deal higher rate. The gas quality, as expected, was quite low, approximately 22% hydrocarbons including liquids.

The gas also contains hydrogen sulfide, which means extra care and expense in all operations. However, our work to date suggests abundant Main Dolomite targets in this general area, which may support sharing production facilities among a number of wells for significant cost savings.

We also found 38 meters of good Rotliegend sand with 17% average porosity and 78% hydrocarbon content in the gas. While the Rotliegend did not trap at this location, the gas and reservoir quality clearly call for a regional seismic acquisition program to look for Rotliegend traps. At our board meeting next week we will discuss mounting an aggressive exploration program in Block 246. And because we hold a 100% interest, we are in charge of the timing.

The Fences concession accounts for virtually all of our reserves and production in Poland. We have been lobbying for quite some time in favor of increasing momentum. Our two most recent discoveries, Lisewo-1 and Komorze-3, together with our just completed 3D seismic, just might help the process along.

We recently completed the depth conversion work on the newest 3D seismic grid, immediately southeast of the Lisewo/Komorze area. We now have identified a total of 11 Rotliegend structures, including the two that have already been drilled successfully. By year end we expect to complete the detailed geological and geophysical reports on nine new drill sites and be in a position to discuss a drilling program with our operating partner.

We have had gratifying results from drilling Rotliegend structural traps in the Fences concession, 9 of 12 commercial successes including Komorze-3. Risk, cost, reserves and production have been very good in this area. We hope to begin a more active drilling program with the support of our partner, and we hope to have similar success in the next dozen wells.

Our results in the Fences concession over the last few years illustrate the kind of model we are looking for in Block 246, the Edge and Warsaw South. Based on the data so far, I believe we will get there and probably in more than one concession area. But remember, we had some dry holes in our early days in the Fences concession, and no doubt there will be a learning curve ahead of us in our other exploration areas in Poland.

Two items are worth a mention before we wrap up. First, we are moving forward with our work on Block 229. We have identified a very large structure in the Main Dolomite with oil and gas potential that is an analog to two big fields in western Poland. We will acquire 2D drill site seismic this winter and probably drill in the second half of 2013 or in 2014. This is a big structure with potential in the several hundred Bcfe range. Not nearly as big as Kutno, but not nearly as risky or as deep.

Finally, I’d like to close the books for now on our Alberta Bakken play in Montana. We drilled some wells as did other companies in the area, all without commercial success. We still hold most of this acreage, but have no further drilling plans at this time. Nor, to the best of our knowledge, do any of the other companies in the region. As Clay mentioned, we have written off our costs in this play.

Now before we take questions, I’d like to list the important events we expect to take place in the 7 weeks that remain before year end. We expect to see first production at Winna Gora. We have started the construction on the Lisewo/Komorze production facility, but don’t expect first production until the second half of next year. We do expect to start drilling two more wells, Tuchola-3 in the Edge concession and Mieczewo-1 in the Fences concession. Finally, we could see the Plawce-2 well tested yet this year.

This year we will have committed to $60 to $70 million of CapEx, including about $20 million of drilling and seismic operations that have started or will start this year but get booked next year. Clay also mentioned that we have $15 million of additional borrowing capacity, about $45 million of cash, and all of next year’s cash flow to support our capital expenditures. The point is that we have the financial resources and the opportunities to maintain a much more active pace of operations in Poland than we have had in the past. This year is just the start.

We thank you for your patience and continued support. Deanna, we can take questions now.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll take our first question from Jason Gammel with Macquarie.

Jason Gammel - Macquarie

Thank you, hi David.

David Pierce

Hi Jason, I wanted to talk -

Jason Gammel - Macquarie

Yeah, happy too, I wanted to just ask couple of questions, first on Frankowo, the Rotliegend, I understand the explanation that you just provided now, I believe you’re looking for essentially [strat] trap there, so did you believe that you will be able to with the additional seismic to be able to identify structural traps or we’ll be looking for structure?

David Pierce

We’re looking for both, my personal preference at least in the early days will be structural traps but will be looking for both and we won’t be able to identify structural traps as well, it looks like a lease up pretty favorably for that kind of thing.

Jason Gammel - Macquarie

Great, and then just question on what you’re seeing in the Main Dolomite obviously with the inter content and it’s to us to be more expenses to produce, how big of discovery I think you need or discoveries I should say you may have more potential sides before you have a commercial material gas discovery there?

David Pierce

I am thinking about the answer of that. I would like to see 100 Bcf and aggregate recoverable reserves. I don’t - we don’t need that much to be commercial but to really make money on it, I mean we don’t want to just trade dollars out here. So, it looks like there lots of these structures there we’ll see some seismic try to appraise sort of what could be the aggregate and we should have that work done about toward the end of the next year.

At the same time I would like to get at least one more well drilled into the Main Dolomite, again by about this time next year, so that we can then walk into 2014 with a real development program. We think there is actually a fairly big number, in terms of reserve potential in the Main Dolomite. So I think this can turn into a pretty good play but we need to seismic.

Jason Gammel - Macquarie

Understood, I appreciate that David.

David Pierce

You bet.

Operator

We’ll take our next question from Chad Mabry with KLR Group.

Chad Mabry - KLR Group

Thanks, good afternoon or good morning, we’re at still. Just curious if you could comment on kind of what production is running there, I mean looking at the guidance for Q4, for to assume that Q3 would have been about 14 million a day and then getting Winna Gora online, still kind of in that 14 million a day range. It seems like maybe in your base declines could be a little bit steeper, just curious if you could comment on what -how production is looking?

Clay Newton

Yeah, hey Chad, Clay, as I mentioned in my part of the call, our production in November 5th was 13.7 million cubic feet a day Winna Gora will come online sometime during the fourth quarter and at that point, depending on the timing that could allow us to report production for the full quarter of 14 million cubic feet a day.

Chad Mabry - KLR Group

Okay, and then could you help out kind of with your expectations for what the let say those facilities expected to contribute, in the back half of ‘13 when it comes online?

David Pierce

I think we haven’t done those the final production test on Komorze-3 so we don’t know that number, we expect to see a Lisewo come on at about 5 or 6 million a day, we have half of that. I’d be quite surprise that Komorze-3 wasn’t approximately the same kind of the rate.

And we expect to see Lisewo-2 get drilled, so it will be coming on in the second half of the year as well, like it’s not will come on about same rate. So somewhere around 6 million a day plus will be added in the second half, I am assuming, we’re successful, let say about two but that’s going into the same structure Lisewo-1 and by right it ought to be productive. And so we can be adding six or maybe a little more million cubic feet a day net, uncertain at this point but that’s my best guess.

Chad Mabry - KLR Group

Okay, yeah, no that’s helpful, I appreciate it. And then appreciate the kind of run down on the prospects just curious what the status was on Lisewo Southeast, I know you talked about it before and had 3D seismic out there, just curious where your thoughts are on that, just one of your larger prospect?

David Pierce

Yeah, as I mentioned, we’ve got that so we’ve got the depth conversion finished on that now. And we see a total of 11 Rotliegend structures in that area right around Lisewo. Two of them of course we have drilled. Komorze-3 and Lieswo-1, but that leaves nne more to drill. As I said we should have our drill side reports ready, our drill side recommendations ready and at the first of the year we will be able to sit down with our partner and hopefully agree on a drilling program. These look like good targets. There is some upside, we’ve -- most of them are in the same range or ballpark range as Lieswo and Komorze in terms of size.

In the aggregate that put us up around maybe 200 plus BCF in the aggregate from these wells. Again that’s a scoping estimate. There is room for something potentially larger and without a well in one of the new structures we can’t say if it really has the larger potential. The false ceiling here turns out to be fairly important as it was with the Lieswo discovery. That discovery contains more, or the bottom closing time to us is deeper than the contour self allows without fall closure and we have that. So assuming we have a similar mechanism at work as we move southeast, we could have much larger reserves than our current scoping estimates.

We’ll have more on that on our, we’ll put a new map up on our website today. Difficult to see but at least we have arrows pointing to where these structures are.

Chad Mabry - KLR Group

And just out of curiosity when is the meeting with your operator to kind of set that schedule?

David Pierce

We don’t have a date set it will be in the very early part of the first quarter.

Operator

We’ll hear next from John Bair with SKA Financial Services.

John Bair - SKA Financial Services

Good morning David and Clay. How are doing?

David Pierce

Good morning John.

John Bair - SKA Financial Services

Just a real quick question about the, if I understood what you said about the production rates, you are going to exit 2012 at about 14 million a day is that right?

David Pierce

That’s about right.

John Bair - SKA Financial Services

Okay, so if Winna Gora is not coming until the next few weeks hopefully or buy the end of the year, I am assuming then that your first quarter 13 overall rate should be higher than that 14. Is that a fair assessment?

David Pierce

Yeah.

John Bair - SKA Financial Services

Okay, which is would I guess would suggest that the well is not necessarily coming back on it equivalent flow rates when it was -- underwent the maintenance work over?

David Pierce

The (inaudible) has been choked back twice this year. We are starting to pull in a little water that we think is near well bore. We currently have a plan to drill another well in in the first half of next year in a little bit higher location and some distant from the current well. We think that will give us some added gas, so it should increment reserves just a bit and we think it will give us much nicer production. But its current rate is about what we expect to see for the near-term.

John Bair - SKA Financial Services

That water cut, what caused the maintenance?

David Pierce

No they shut it into to look at pressures again and while that was shut in, they found some more things they wanted to work on, so they did some more and I was not terribly happy about losing the month of production, but I am always happy to see them stay ahead of the maintenance curve.

John Bair - SKA Financial Services

Okay and going back to Kutno, what would you your main takeaways from that July perspective on that well. In the sense of is there any additional potential for additional drilling activity there or will you evaluate whether you are going to drop that concession what are your thoughts there?

David Pierce

Well, we’re still on the postmortem phase on that well. Well we’re yet -- we are yet cleaning sands, we had good for us, there we have got good gas quality, but we were in a flu real setting there. We have got nice Rotliegend sands, mixed and inter betted with, all kinds of other crap that isn’t very good for production. It’s certainly possible that there are pockets within the structure. We are still of view were still evaluating and we will probably make a final decision late in the first half next year about what to do with this concession. Yes, there is potential but that’s a deep expensive place to work. So we’ll have to figure out the balance on that and decide what to do.

John Bair - SKA Financial Services

Well that’s getting added, it is deep and it is expensive so, unless you really saw something that that really tweaked your interest that you thought there might be some additional play in there, whether that’s an interesting story over the last five or so years and would you consider possibly try and don’t shop at around for farmout or somebody else would be interested in drawing it into or...

David Pierce

Yeah, we’re…

John Bair - SKA Financial Services

Now too much work on your part to be able to go out there and getting some up that, if you get somebody else interested in drilling it.

David Pierce

And it is really positive that we saw gas down that deep. We would correct in our daily geographic reconstruction. The block in fact has not been very deeper than it is and the salt cover provides some temperature relief. These are all real positive things, but at the end of the day, the reservoir quality at least at this drill site just isn’t adequate for you to make this well commercial. We’ll go through all the data, we’ll try to figure out it exactly what we think is going on there and figure out what our next steps are and that will happen. We are working on it now. It will --probably the process will continue into the first half of next year.

John Bair - SKA Financial Services

I have got another question but I will get it back in queue, I’ll let somebody else in.

David Pierce

Okay, thank you.

Operator

We’ll take our next question from Joel Musante with C.K. Cooper & Company.

Joel Musante - C.K. Cooper & Company

Hey David and hey Clay, how are you doing.

David Pierce

Good.

Clay Newton

Good.

Joel Musante - C.K. Cooper & Company

If I recall correctly do the potential prospect that you had and --hat you were looking at, I think it was at the SKS facility or you know well grouping. I thought you might be able to put another well in there and you were going to be able to determine that when you too pressure readings and that would occur during the maintenance period, and given that you know you just got through one of your maintenance period that was -- just wondering if you were able to make any kind of determination there?

David Pierce

We wanted two things in order to see if we had some additional potential there. We wanted, about a year’s worth of production and watch the material balance after that year and we also wanted to reprocess the 3-D seismic in that area given the number of wells we have. Now we have recently completed the fieldwork on a little extension of the 3-D seismic and you’ll see that on our newest maps it’s just to the north of that. We plan over this winter to get that seismic processed and to integrate it with the existing 3-D in the area. Those two things together the pressure test results and the reprocess 3-D seismic. If there is more to be had there that’s going to give us the evidence. So it is going to be several months yet before we have that decision made.

Joel Musante - C.K. Cooper & Company

All right and just from the pressure readings were you able to tell anything about your reserve base whether you would have any increases or decreases based on those readings?

David Pierce

We won’t have that until about February I think, when we come out with our new reserve report on the area. What we are seeing is that, is that the gas migrations prove the structure, we think that the (inaudible) well and the short four wells that those two communicate even though they are I think four or five kilometers apart, but we haven’t seen that yet. So we think that the gas movement through the structure is a bit slower than we had anticipated. So we should be able to come with some answers on that in our reserve report in February.

Joel Musante - C.K. Cooper & Company

Okay, very good. That’s all I had, thanks.

David Pierce

Okay, you bte.

Operator

We’ll hear next from Roger Liddell with Clear Harbor Asset Management.

David Pierce

Roger how are you?

Roger Liddell - Clear Harbor Asset Management

Good, thanks. Questions on, I am not wild about hearing of low BTU in the Frankowo Dolomite. So, hold my hand what is the marketplace for low BTU and is this economic?

David Pierce

Well Roger I am glad you asked that question. It’s a little bit complicated to put in the main remarks but it’s an important one. Low BTU gas actually has a good bit of demand. The nitrification plants there is two of them sort of in that area of Poland. They take what is mostly 80% like in the fences concession and they turn it into a 100% gas. There they run more efficiently if their starting point is lower. So if we take low BTU gas of 22% and mix it with 80% gas then they’re operational as more efficiently. So there is plenty of demand for that gas to go into the denitrification plants.

Economics, you are going to the same price for the methane content that you would for any other gas. So the real question is how much total gas has you got and that’s the question. You’d really want this to be a fairly big operation, although I think on a technical level it is likely that this well would be commercial on its own. It would be pretty much a dollar trading operation. But if you can share production facilities, if you can drill a bunch of wells and do it on day rates and get costs down and managed the whole thing it can be a money maker.

Bill claim you remind me so that whole looking for there that happened. We think the most promising for the mangle my. Also hearing that we think is the most promising for the Rotliegend so our liberation program going forward of that. The board next week the to really focus in on this area on on now will make dolomite on an unrelated you would not produce the main dolomite and the Rotliegend from any single well and will be separate of the of the matter shallow and if you’re drilling purpose-built wells and do it on day rates, you should be able to cost way down. So yeah, I think this can definitely, turn in - we need to see how many targets have we got and we need to make sure that they’re going to work but, this well surely provides a lot of encouragement.

Roger Liddell - Clear Harbor Asset Management

Okay, glad to hear that. Next point. You haven’t really given any texture on the Komorze-3 and why it’s taken such a long time to get to where we wanted to be. Can you any texture, useful for that purpose?

David Pierce

Yeah, the Komorze-3 well has better porosity than we had anticipated. And so even though it’s a little bit deeper than Lisewo the end looks pretty good. And when they plug back, and we did an initial production test on it. And they had simply plugged back too far. And we weren’t getting the flow rates that we wanted. I’ve had several people I ask this is about Frankowo. We mentioned that we had I think 45 - 46 meters of pay and we tested the top 5 meters and people will ask well why didn’t you test all of it?

Well, you never do. You just test the top little bit, but on the Komorze-3 we got that little bit down too skinny. So we had to go tick-off and re-complete the well and we’ll get a production test done there. But I would be very surprised if it turned out any differently appreciably different than the Lisewo well.

So it’s just a matter of getting that job done. Everything we see in that structure looks about like it does in Lisewo. So that’s as much texture as I can give, without having the actual production test numbers, but I would sure hope to see that done and tested and so we’ve got that booked at yearend.

Roger Liddell - Clear Harbor Asset Management

Okay. What probability might you give to being able to book it?

David Pierce

Well, I am sorry, we will book reserves, the production test will give us a greater degree of confidence in the accuracy of our number. But the number is primarily a volumetric number right now and that’s seismic dependent.

Roger Liddell - Clear Harbor Asset Management

Right.

Clay Newton

In other words-

Roger Liddell - Clear Harbor Asset Management

Is it better than a 50% - 50% that a production takes place in 2012?

David Pierce

Yes.

Roger Liddell - Clear Harbor Asset Management

And finally on the your comment about the Lisewo area including Southeast with 11 targets of which two drilled, I got that part, but there are believe 4 satellites that we know of long ago, so that would leave if my math is right we’ve got 5 as it were unaccounted for which I take it are down in the Lisewo Southeast.

David Pierce

Yeah. Mike - it’s 6, but yeah, 5 or 6.

Roger Liddell - Clear Harbor Asset Management

Okay. Is, have you seen anything that makes you think that this is a fragmented area and that what you’ve represented on the cartoons on the past is open to challenge?

David Pierce

Well the cartoons are always open to challenge. We do have within area that we were depicting as potential, for Lisewo Southeast we have structures there that we can see. Now that we’ve got our [depth] conversion done. It maybe either they are separate, it may be that that cartoon was more on than you might imagine. And we won’t know that for sure until we drill right there, and what will tell us is of course the pay thickness. But certainly, what feel quite confident about on these structures, what we feel quite confident about, yes, it’s smaller than what we depicted in the cartoon. But the cartoon is not that, we need a well there to see if we might get something bigger.

The structures that we do see look like they’re going to be of commercial size and in the aggregate, give us maybe a couple of hundred bcf of additional gas on top of the Komorze and the Lisewo structures.

Roger Liddell - Clear Harbor Asset Management

Yeah, okay, thank you.

David Pierce

You bet.

Operator

We’ll take our next question from Dan Mittag with Oppenheimer and Company.

Dan Mittag - Oppenheimer and Company

Good afternoon, or actually good morning still. My question was originally K-3 and you answered it. But I’ll ask a broader question, I was looking at stock valuation and really where we were October of 2003, in terms of stock price. What do you guys have to do to get your partner in Fences, off [dead] center and really drill that prospect to get increased production to maybe generate some interest in your stock?

David Pierce

Well, I think we have to be persuasive on a technical level. And I -- as I said, I think those two discoveries, Lisevo, and Komorze plus the 3D seismic that we’ve got now and the number of structures that look to be capable of adding production during near term that ought to be persuasive. So we plan to sit down with them in the first quarter and see what kind of a program we can get agreed to. I know that our partner has said publicly that their number 1 priority is to increase production.

And they don’t mind if it’s conventional, unconventional whatever, so I think we can make a real strong case for, here’s place where the work is done, get a couple of rigs out there, lets drill them up and hook them up. Makes sense to me, and all I can tell you is that we’re we’ve got our marching orders to go over there and do everything we can to make that happen.

Dan Mittag - Oppenheimer and Company

Okay. Thank you.

David Pierce

You bet.

Operator

We’ll take our next question comes from [Alec Rutherford] with (inaudible) management.

Alec Rutherford - Analyst

Hey, guy thanks. Actually my questions have already been answered. Thank you.

David Pierce

Okay. Appreciate the call. We’ll take one more.

Operator

Your last question will come from John Bair with SKA Financial Services

John Bair - SKA Financial Services

Hi, guys. I want to go back to Frankowo real quick. And wanted to ask you, in your AFE, did you take into consideration the H2S possibility and drawn completing and so forth.

David Pierce

Oh, yes. The main drilling I’ve done in that area, typically contains H2S. An I think we’ve said before we drilled the well. That we knew that the range of hydrocarbon content ran from something like 20% to something like 40%. In that little area down there. We got exactly what we expected, there were no surprises.

John Bair - SKA Financial Services

And there aren’t any existing facilities that are capable processing H2S gas, or do you have to build that all out?

David Pierce

We have to build a production facility for every well that we produce over there. Now we don’t have to produce amount on one-to-one basis. You can draw production from several wells into a single facility. But and those are the local ones. And there we knock out a little bit of condensed water, we knock out mercury in the case of hydrogen sulfide, that’s actually the first thing that we’ve knock out. So it’s part of the little plans that is associated with the well adds if you will.

Then that gas gets shipped down the line and there’s a de-nitrification plant that collects gas from lots and lots of wells. But you have to meet the pipeline standards to get into there and that’s why each of the wells has it’s own little production facility. So yeah, there will be a little bit more expenses than normal but, not terribly much more expenses, but given that you’ve got a lower total hydrocarbon content, you really needed to watch your nickels and dimes.

And the flipside of that is, I don’t know I’ve heard somebody describe the Main Dolomite these REITS, came like cockroaches there’s never just one, there’s always a bunch of them. And in fact that’s what our work suggests that there are a bunch of these REIT buildups around. And so we - in the Fences we’ve typically found fields where one well and one production facility makes sense given the volume of gas that you have and the distance to the next field.

And here what you hope is that you have a bunch of these wells fairly close together and can do a lot more sharing of these local production facilities. And it’s just about development economics.

John Bair - SKA Financial Services

Well, along the same lines then is it possible that your development plan would be to fairly quickly move, let’s identify a cluster of six of these structures, fairly close together. Would you be able to have the confidence to signature one well and then move over to a second location and then drill it and assuming it’s good move on to another one and so forth. And help to minimize your overall costs of drilling and mobilizing the rigs and so forth?

David Pierce

Yeah, that’s exactly what you do here. First get the - and we’re not talking about a small area. It’s not very efficient but over a little bit larger area, get the seismic shot identify the prospects, drill another one or two as sort of standalone, does this work? Then once your confidence boosted that these are going to work, get out there and drill all that you’ve got. And at the same time get into the construction of production facilities. So you want to treat this a little bit like a factory deal, assuming you’ve got targets there, and right now that’s it looks like that maybe the case. But we’ve got to - we’ve got to go shoot some seismic out here.

John Bair - SKA Financial Services

And one last there, the 2 million a day initial flow test if I understood right, you thought that was a little bit on the low end, what you ultimately could do on a true completion.

David Pierce

Well, normally when you test a well you kind of let it go. You let it run pretty good and that cleans out. Because you’ve been drilling with certain, all the force basis, you’re all gunned up, and you let it run for a while just to clean out. And you can tell them as to we didn’t do that here. Our main target in this well remember was the Rotliegend. The Main Dolomite was a bonus.

All we wanted to do was make sure that we had the gas composition correct, make sure that in fact it looked like it would flow pretty good. And then temporarily abandon it, and go see if there’s a development program to be done. Because if this - particular main Dolomite structure, if that was it. We would then keep it. But together with a bunch others, it’s worth real money.

So it was not necessary to run a full-on production test here and given the hydrogen sulfide content, you don’t want to do any unnecessary layering or testing.

John Bair - SKA Financial Services

All right.

David Pierce

If you don’t want to do that, so if it is hadn’t contained H2S we probably would have done a full on production test, but you need to balance, being a good neighbor against getting the data that you need versus the data that you’d like to have.

John Bair - SKA Financial Services

Pretty good, thank you.

David Pierce

You bet. That’s a wrap on us, Deanna.

Operator

Thank you, and that does conclude today’s conference, we appreciate your participation. You may now disconnect.

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